Who Needs Bank Branches?

William Baldwin
, ContributorOpinions expressed by Forbes Contributors are their own.

The HSBC branch on Manhattan's 14th Street was an imposing structure back in the day when a bank's physical size said something about its balance sheet. You could play volley ball in the cavernous lobby. Seventeen teller windows, most of them deserted, are still part of the layout. Missing from the picture: a crowd of customers. The people who used to line up in front of tellers are now doing their banking electronically. Unfortunately for the likes of HSBC, JPMorgan Chase and Citigroup, prosperous clients are discovering that they do not have to do their Internet banking with banks. They can bank at Charles Schwab or Fidelity instead.

Here's the deal. You have your paycheck deposited electronically at the discount broker, just as you would at a bank. You get checking, a debit card and online bill paying, all free. When you need cash, you get it from any bank ATM you want, and Schwab and Fidelity will reimburse you for the ATM fee. A similar rebate is offered by USAA, a mutually owned firm that started out selling insurance to veterans and is now running a de facto national retail bank out of a single branch in San Antonio.

Schwab and Fidelity are acting rather like cuckoos that borrow other birds' nests. Let some bank dig deep into its pockets for the real estate. The discount broker buys a spot at the ATM there for $2.

Says James Burton, who heads retail brokerage for Fidelity Investments: "The time has arrived when a lot of people can do very well with a firm like Fidelity for all of their cash management." He won't say how many of his customers are putting paychecks directly into Fidelity accounts--meaning they have probably cut the cord with conventional banks--but it's clear that this upstart is getting big in banklike services. Last year customers did 7 million transfers of money into and out of Fidelity accounts.

Branches, now numbering 98,500 (including 10,800 savings bank and S&L branches), used to be a competitive advantage for banks. As deposit gatherers they were a cheap source of funds. That model isn't working just now. Reason: The Federal Reserve's easy money means that funds for overnight lending aren't worth anything. Branches are taking on the looks of Borders bookstores. Robert Meara, a retail banking expert at consultant Celent, says that the nation's branch count peaked in 2009 and has begun a steady decline. "Branches are not irrelevant, but their relevance is eroding," he says.

Futurists have predicted the demise of branches before, and so far have been proved wrong. "New technology doesn't tend to substitute for branch banking but to complement it," says Charles Calomiris, a professor at Columbia University's business school. But he concedes that a coming generation of savers--kids who grew up texting on cellphones--may finally change that historical pattern.

Who needs a drive-through teller window anymore? You can scan a check with your mobile device, and it goes right into a Fidelity or Schwab account.

Banks can do a lot of things that Fidelity can't, like issue loans and service small businesses. But Fidelity doesn't particularly want to be chasing after borrowers for a car payment or rolling up quarters for a convenience store.

When it comes to making wealthy depositors happy, Fidelity can beat the banks at their own game. A bank account is FDIC-insured for $250,000. Burton boosts the ceiling to $1.75 million with software that automatically carves up a cash balance and disburses it to separate FDIC-insured accounts at different commercial banks.

Remember the 1990s catchphrase "financial supermarket"? We're getting that, but it's not what Sanford Weill had in mind when he created Citigroup by merging a bank with a stockbroker.

In the original formulation the teller had access to the customer with the big paycheck and merely had to steer him down the hall for the bank to make a second fee by managing his portfolio. Instead we have discount brokers undermining the banking industry.

In this contest the electronic broker is inherently a leaner player than the glad-handing banker. The striking difference between the two kinds of business is captured in asset figures. JPMorgan Chase oversees $4.1 trillion ($2.2 trillion of its own and $1.9 trillion of other people's money) with 250,000 employees. That's $16 million each. Schwab's 13,100 employees handle $1.7 trillion, or $130 million each.

Banks offer the same blend of investing and checking that discount brokers do. But it goes against their nature to cut prices. Schwab advertises a commission-free index fund costing 0.1% a year; your JPMorgan account representative will talk about his Large Cap Core Plus costing 1.75% a year. Schwab will do a 2,000-share stock trade for $9; JPMorgan wants $55 for the same work.

Banks have the misfortune to be confronting the discounters just when marketplace and legal changes are drying up some of their traditional revenue sources, like packaging subprime mortgages and gouging people with overdraft fees. An economist at a bank regulatory agency (who asks for anonymity) estimates that $25 billion a year of bank-fee revenue is evaporating. That's a lot for an industry that netted a pretax $104 billion last year.

An exception to the general rule that banks are expensive: a Bank of America account called Merrill Edge, which beats even the discounters on trading commissions. Evidently BofA sees the handwriting on the iPad. It is in the midst of axing 10% of its 5,800 branches.

Cut Your Bank Fees

You can probably get a better deal from a brokerage firm.

You're a candidate for broker-based banking if (a) you already have a brokerage account and (b) you are annoyed by rising bank fees.

The biggest discount brokers have only a few hundred branches apiece, but that's not a worry if you do your bill paying and stock trading online. Have your paycheck or Social Security payment direct-deposited. Deposit paper checks by scanning them into an iPhone or Android mobile device (iPad apps are on the way). Use any bank's ATM for cash, and get the ATM fee rebated.

Schwab has a no-minimum checking account that is FDIC-insured and pays 0.25%. It's linked to your brokerage account, so that an overdraft is covered by a margin loan against your securities. That loan won't cost too much if you pay it off right away. Schwab handles most of its banking services through its own bank subsidiary, with $57 billion in assets.

Fidelity has no bank of its own but connects electronically to accounts at banks like Wells Fargo and Fifth Third. It pays 0.1% on a no-minimum checking account. (The associated brokerage account has a $2,500 minimum.) Hard to beat: a no-annual-fee American Express charge card that Fidelity offers with assistance from Bank of America's FIA Card Services subsidiary. It rebates 2% on all purchases.

If you can't bear the thought of giving up bank branches, move your business to BofA and take advantage of its cut-rate Merrill Edge. Online trades cost $5 to $9, depending on account size.